GM takes first steps toward health

David Robinson
Sunday, July 2, 2006

Buffalo Evening News

General Motors Corp.'s crash diet is going a little better than planned.
But that's only part of the solution if the struggling automaker is going to return to health. The harder part will be to to come up with the cars and trucks that can reverse the steady decline in its U.S. market share.

That was all to apparent last week. On Monday, GM announced that 35,000 workers had accepted its buyout and early retirement offers, a successful initiative that will allow it to slash its costs by $1 billion more than planned and reach its target for shrinking its work force two years early. "These moves have given us a fast start," said Rick Wagoner, GM's chief executive officer.

But the next day, GM made another announcement that made it clear that cutbacks alone won't solve GM's problems.
The automaker said its sales through May were down 8 percent from a year ago, prompting the company to roll out no-interest financing incentives for up to six years on most of its vehicles through July 5.

It was hardly a blockbuster step in the incentive game, like employee pricing discounts, but it was a step back for GM, which has been trying to wean itself off costly promotions.

"GM continues to face strong headwinds to turn around its North American operations," said Kam Hon, an analyst for Dominion Bond Rating Service in Toronto.

High gasoline prices are driving customers away from the gas-guzzling SUVs and pickups that are so important - and so profitable - for GM and toward more fuel-efficient vehicles that are the specialty of its Asian competitors, such as Toyota Motor Corp.

Rising interest rates aren't helping either, by pushing up the monthly payments on car loans. Those rising borrowing costs, high energy prices and the possibility the economy might cool could lead to a drop in consumer spending, which wouldn't bode well for car sales, either, said John Novak, an analyst at Morningstar Inc.

Still, as 1,700 local GM and Delphi Corp. workers head out the door with early retirement or buyout packages in their pockets, Wagoner said the cost-cutting will give some much needed financial flexibility.

While the buyouts and retirement offers will cost GM $3.8 billion this year, Novak estimates that GM will cut its labor costs by between $1.5 billion and $2.5 billion a year, beginning in 2007.

"It makes us more cost competitive and it frees up more resources to be able to invest even more in products and technology," said Wagoner, who predicted that GM has "good news coming" from its lineup of new products.

Wagoner also thinks the strong acceptance rate of the buyouts and retirements at GM and Delphi will help the bankrupt auto parts maker reach essential agreements with its unions on a labor deal.

About 12,600 of the 13,000 Delphi workers who were eligible for early retirement accepted the offer. Another 5,000 Delphi workers are expected to return to work at GM, Delphi's former parent.

"It goes a long way to address the issue of a future for Delphi that works for everyone" by being fair to workers, helping Delphi become competitive and giving GM a source of competitively priced components, Wagoner said.

"All that is facilitated by having an answer to the question: What's going to happen to the people involved?" Wagoner said. "This is a real big step in that direction."

With Delphi's Lockport plant one of just eight U.S. factories that is expected to survive the parts maker's plunge into bankruptcy, a Delphi deal would be welcome relief.

For GM, whose Tonawanda Engine Plant is a pillar of the region's shrinking manufacturing base, the cost-cutting is off to an encouraging start.